Here's What To Make Of SpartanNash's (NASDAQ:SPTN) Decelerating Rates Of Return
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think SpartanNash (NASDAQ:SPTN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for SpartanNash:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = US$119m ÷ (US$2.4b - US$660m) (Based on the trailing twelve months to December 2023).
So, SpartanNash has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 9.7%.
View our latest analysis for SpartanNash
In the above chart we have measured SpartanNash's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for SpartanNash .
The Trend Of ROCE
Things have been pretty stable at SpartanNash, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at SpartanNash in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. This probably explains why SpartanNash is paying out 44% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
The Bottom Line On SpartanNash's ROCE
In summary, SpartanNash isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 55% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One more thing: We've identified 3 warning signs with SpartanNash (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.
While SpartanNash may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
